The Square Box is considering two independent projects with an initial cost of $18,000 each. The cash inflows of Project A are $3,000, $7,000, and $10,000 for Years 1 to 3, respectively. The cash inflows for Project B are $3,000, $7,000, and $15,000 for Years 1 to 3, respectively. The required return is 12 percent and the required discounted payback period is 3 years. Based on discounted payback, which project(s), if either, should be accepted?
A) Both projects should be accepted.
B) Both projects should be rejected.
C) Project A should be accepted and Project B should be rejected.
D) Project A should be rejected and Project B should be accepted.
E) You should be indifferent to accepting either or both projects.

Question

Quizplus · Accepted Answer

To determine which project(s) should be accepted based on the discounted payback period, we need to calculate the present value of the cash inflows for each project and see if they cover the initial investment within the required period of 3 years. For Project A:- Year 1: $3,000 / (1 + 0.12)^1 = $2,678.57- Year 2: $7,000 / (1 + 0.12)^2 = $5,580.36- Year 3: $10,000 / (1 + 0.12)^3 = $7,103.29Total PV of cash inflows = $2,678.57 + $5,580.36 + $7,103.29 = $15,362.22For Project B:- Year 1: $3,000 / (1 + 0.12)^1 = $2,678.57- Year 2: $7,000 / (1 + 0.12)^2 = $5,580.36- Year 3: $15,000 / (1 + 0.12)^3 = $10,629.92Total PV of cash inflows = $2,678.57 + $5,580.36 + $10,629.92 = $18,888.85The initial cost of each project is $18,000. Project A's total present value of cash inflows over 3 years is less than its initial cost, meaning it does not meet the discounted payback period requirement. Project B's total present value of cash inflows exceeds its initial cost within the 3-year period, meaning it meets the discounted payback period requirement. Therefore, Project B should be accepted.

The Square Box Is Considering Two Independent Projects with an Initial